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2009 | FALL EDITION | RICSAMERICAS.ORG
PROPERTY AN INFORMATION RESOURCE FOR
RICS MEMBERS AROUND THE GLOBE
ARE WE THERE YET?
COMMERCIAL REAL ESTATE’S
LONG ROAD TO RECOVERY.
MEXICO IN TIME OF CRISIS CANADA’S REAL ESTATE MARKETS TOWN PLANNING IN ITALY
RICS-PWFall09.indd 1 11/5/09 2:43 PM
For example: What if a lender had made a single-family mortgage an institutional structure for countering the destabilizing effects of
loan in 2005 based on a two-value appraisal? Say short-term frothy property markets. Its methods are an approximation for getting
conditions support a current market value of $650,000, but also that at a long-term value, and have apparently worked quite well. MLV is
this value demonstrates a divergence from the long-term trendline now included as part of International Valuation Standard 2, but has
based on property type and market area, and another value was apparently not been adopted by any other countries or institutions.
concluded at $400,000. The lender is now faced with a much more
firm underwriting basis than with the $650,000 value alone. There Expanding the role of asset-level valuation
are actually two collateral assets, one valued at $400,000 and one
Existing risk-management tools are divorced to a large degree
at $650,000 — $400,000 = $250,000 (hardly a small difference).
from the underlying assets, making broad assumptions about
A long-term loan can reasonably rely on the $400,000 value, and
growth rates (6-8 percent into perpetuity?!), which have been
its expected long-term growth rate. Of course, the growth rate
known by valuers to be absurd. The problem is that apparently no
could change, and the value could again be subject to short-term
one (on Wall Street) thought to ask, confirming that conventional
conditions at any future date. Nonetheless, the long-term based
wisdom has been driving their myopic risk analyses. Recognition
value would present less risk of loss than the short-term (current)
of MLV, or some other standard that parses short- and long-term
value. The $250,000 difference between the two is clearly a riskier
perspectives, would provide a much more secure reliable foundation
Year component of current asset value, and could be underwritten as such.
for the higher-level tools used by institutional risk analysts.
Figure 1: U.S. Inflation-Adjusted Home Prices What about the reverse situation? What is an appropriate price
The current MLV standard makes a substantial effort to achieve long-
reference when the market is temporarily depressed? What if the
term values for income-producing properties, adjusting cap rates,
long-term value is $400,000, but the market will only pay $280,000,
rent levels etc., but so far appears to be less effective with respect to
become enormous. Perceptions that were outrageously optimistic conditions, asset values can indeed be used to underpin long- due to oversupply or any number of other current, short-term
single-family and other owner-occupied and non-income-producing
have turned depressingly pessimistic, and what might have been term loans and investment, and these observations would argue conditions? The $120,000 below-trend value is also due to short-
types. However, valuation technologies have continued to advance
experienced as a normal return to a relative stable, long-term trend, for high ratings in their associated credit derivative instruments. term conditions. The lower value is meaningless in the long-term,
since the standard was established and they could be brought to
is instead being viewed with much hand-wringing and grief. but does reflect an impaired ability to sell now. A recovery to
The short term is another story, as short term pricing is highly bear on the issue by the valuation profession. Such an analysis of
$400,000 will occur at some point, although its timing is uncertain.
Were individuals really richer, or was the experience guaranteed vulnerable to unexpected events. Unsustainable capital market the effect of time on value is currently in use for many property and
The market may even fail entirely (as for certain types of bank-held
to be fleeting? Did stable assets really become unstable? Were conditions and (local) natural disasters, to name just two, can ownership conditions. Examples include highly developed statistical
derivative securities). It’s the ability of the holder to wait that gives
the foundations of risk analysis realistic and appropriate? Much cause short-term pricing behavior to diverge considerably from methods (for examining and tracking broad markets), real estate
the assets value under these conditions. This is not so different from
of the blame for the collapse of the fanciful parallel universe the underlying long-term trend. Is short-term pricing a suitable damages (which demonstrate recovery to normal pricing levels
various commonly-observed impairments, attributable to ownership
is aimed at the entirely unexpected, widespread/systemic benchmark for long-term decisions? It still may be, so long as any over time), marketability impairments (risk of a forced hold) and
(undivided interests held by two or more parties, for example), or
nature of the decline in property values. However, a closer deviation from the long-term trend is identified and understood. The other methods. Valuers have the tools to parse between short- and
physical impairments (such as toxic contamination). Impairments
examination of asset pricing reveals that we have not been outsized risk exposure comes when deviations are not understood; long- term conditions, and deliver value opinions based on these
are generally cured over time, with the property trading at less than
telling ourselves the truth, and that a decline was inevitable. when short-term “frothy” pricing is used as evidence of market value premises. Of course, developing uniform methods and training
its “stabilized” or long-term value during the impairment period.
for long-term decisions. The reverse problem arises when prices (of programs will take some doing; but is there really an alternative?
What is it with asset prices, anyway? property or derivative paper) are depressed, or when markets fail, It would make sense for valuers to go beyond their current/traditional
impairing the short-term market value of collateral. In either case, policing function, and parse their opinion into short- and long-term
Real Property assets are among the most stable and least volatile
the consequences of poorly understood asset values are not trivial. components. It does no good for valuers to bail out of opining The notion of financial stability should, by now, be ready for prime
fixed assets over the long term, normally exhibiting a reasonably
on such issues, on the basis that they should not be involved in time. The question is… Are we really committed to adopting a
consistent historic trend over time. Even at present, a portion of Are valuers actually helpful? underwriting decisions. Valuers are the ones in a position to analyze long-term mindset? If so, someone needs to attend to the long-
a property’s value is, indeed, quite stable; its long-term value is
and understand what is and is not a stable and reliable value. This is term value trends if we are to a) substantially reduce the effects of
reasonable predictable, and not strongly subject to unexpected What happened to the checks built into the property finance
not a simple undertaking, to be sure, but an essential step toward unexpected events, b) provide some counterbalance to the positive
events. However, another portion is more directly affected by system? One such check involves market-value appraisals. Did
establishing popular and institutional awareness of sustainable value. feedback system which encourages both ever-escalating asset
short-term (unsustainable) conditions, which can conspire to inflate banks and investors rely on appraisals? If so, did they help, hurt,
or deflate value well beyond an expected range, and exposure to or do anything useful at all? Appraisals are generally intended to values on the one hand, and the collective malaise and liquidity
The Germans are convinced
unexpected events can become great. When this happens on a make sure that the collateral has sufficient value to support the impairments that depress values. If not the valuer (who has been
wide scale—when short-term and long-term value components are loan, but the market value premise is only a snapshot in time. The Just such a method for appraising commercial property under generally marginalized into the role of policeman), then who? Who
conflated and confused—a bubble or depression can begin to feed appraisal typically considers property, its local environment and conditions approximating the long-term was established in 1996 by really understands the assets? If we want to build a sustainable
on itself. A positive feedback loop amplifies the value trend in both capital market conditions with reference to other (comparable) German Pfandbrief mortgage banks for collateral used with highly financial system, we may have less fun when bubbles begin to
directions. Property owners experience themselves as unreasonably transactions and current investor (or home buyer) behavior. This rated covered bonds. Under this system, valuers provide opinions soar but will endure far less grief when they come back to earth.
rich or poor, and derivative securities that are designed to rely on is largely a policing function, where a neutral party (valuer/ of “Mortgage Lending Value” (MLV), defined as: “The mortgage Continuing our historic myopia will not serve the sustainability
property’s fundamental stability can become severely impaired. appraiser) offers an opinion of value that may or may not match value of a property is the value that can be expected with a high level needs that the future demands. I do believe that what will serve
the transaction price. But assuming the transaction is consistent of surety, derived from the historic perspective of market events at us long term, as an achievable and maybe even transformational
Unexpected events do not typically affect the long-term trend,
as suggested by Robert Schiller’s inflation-adjusted home price
with others… what if the entire market has been moved by the time of the valuation, on the basis of the durable characteristics, goal, is widespread understanding of the truth about value. •
external conditions, such as easy money, lax lending standards, and and which will be achieved in normal property transactions over a
index, shown in the chart for the postwar period. The aggregate Dennis A. Webb, ASA, MAI, FRICS
other short-term conditions that have big pricing effects. What long period in the future.” The mortgage banks using this system of
U.S. data shows that long-term values have been reasonably Primus Valuations
good does it do the long-term lender to know that a transaction valuation may lend over the threshold allowed by a property’s MLV,
stable; further, local market values for all property types normally Primusval.com
price matches a market skewed by short-term conditions? but the excess cannot be used as security for covered bonds. Thus, a
follow cycles that are reasonably well understood. Under such email@example.com
two-tier risk/cost structure for loans, which is exactly appropriate as
10 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 11
RICS-PWFall09.indd 10-11 11/5/09 2:43 PM
Art & Real Estate Art & Real Estate
Site Specific Art: Where Real
sales of similar properties are sought from appropriate markets prices on the secondary market for resale are very limited and
where transactions involving similar items occur with regularity. prices are comparatively modest. However, the particulars of
this commission made it a unique engagement and inspired the
When it comes to site-specific art however, depending upon artists to undertake other projects on a monumental scale.
Estate and the Art World Intersect
the purpose of the valuation, it might be appropriate, indeed
necessary, to consider also the Cost Approach. Value would be Site-specific commissions promote the possibility of working on
based upon the cost of duplicating or re-creating an identical a hitherto unimagined scale, adapting and transferring work
piece. When the method of construction or materials used is to different media, and enabling artists to reach large, new
Beverly Schreiber Jacoby, FRICS, explains why site specific art must be valued not replicable, the artist is alive, approves and is willing to re-make an audiences on a daily basis. For example, another notable new MTA
identical piece, the Cost Approach method should be considered. commission is Sol LeWitt’s work at the 59th Street-Columbus Circle
only by its intrinsic qualities but on the merits of the location.
Artists who specialize in large-scale and site-specific works may subway station. Entitled MTA Whirls and Twirls, the mural will
not enjoy robust secondary markets if their practice consists consist of ribbons of color ceramic tiles traversing the entire south
of permanent installations that may take months and years to wall (floor to ceiling) of the Intermediate Mezzanine Landing at the
complete. As a result, there may be few appropriate comparables. transfer point between the IND and IRT Lines. Additionally, there
will be two porcelain tile floors entitled Compass (57th Street) and
Actually, the artist may not need to be alive for originals to be Compass (58th Street) on 57th and 58th Street mezzanines. The
re-fabricated. Sol LeWitt (American, 1928-2007), the conceptual project is scheduled to be installed in 2009. Sandra Bloodworth,
artist who stressed the idea behind his work over its execution, Director, Arts for Transit (MTA), noted that MTA commissions “are
died in 2007, but during his lifetime his wall drawings were diverse in every way while upholding the goal of speaking to the
executed by trained studio assistants. One of the motivating riding public. From emerging artists to very well-established artists,
factors surrounding the long-term retrospective of LeWitt’s work in such as Roy Lichtenstein (42nd Street Station), the works are valued
Adams, Mass., at Mass MoCA was the explicit intention that the accordingly.” The MTA self-insures, but its art is covered separately.
large exhibition would facilitate the training of a new generation
of executants to carry on with his practice. During medieval During the 1980s when New York City was a less safe and friendly
and Renaissance times, when masters belonged to guilds and town, when there were few public art or other opportunities for
academies, it was understood that the studio would continue to young artists to work on a monumental scale, Keith Haring (1958-
work from the master’s models after his death. Therefore, the 1990) discovered that tarps, fences and walls worked as handy
approach of LeWitt’s studio is not much of a departure from supports for large scale paintings. In 1987 he executed a joyous and
centuries-old practices. For an artist of such renown, with a high-spirited mural on a cinderblock wall in a children’s community
decades-long roster of public and private sales, researching center gymnasium on Pitt Street (Acrylic paint on cinderblock wall;
price point data combined with estimating time and labor costs 20 x 20 feet; 6.10 x 6.10 m). “The Lower East Side Boys Club
“MTA Whirls and Twirls” Compass (57th Street) and Compass (58th Street) (2009) Sol LeWitt, 59th Street-Columbus Circle, A, B, C, D, 1 lines, MTA New York City Transit. would enable one to arrive at a strong basis for valuation. Mural” was one of eleven public murals Haring executed during the
Commissioned and owned by Metropolitan Transportation Authority Arts for Transit. 1980s in New York and around the world. The successful “rescue”
Infrastructure, transportation and official projects in the United and removal of the intact, undamaged mural from the Lower East
States often include commissioned, new public art work through Side Boys Club by professional riggers, conservators and gallerists
f the real estate world operates according when valuing the work, but there are many “Percent for Art” legislation and policies. For example, New York before the Pitt Street building was demolished in 2008 was widely
to the truism “location, location, location,” factors to consider. The valuation process begins City’s Metropolitan Transit Authority (MTA) has applied a portion heralded in the media. Authenticated and supported by the Keith
the same motto does not necessarily apply with questions such as: Is the work of art an of its Capital Program funds to commission permanent works Haring Estate and Foundation, “The Lower East Side Boys Club
in the art world. This insight informs one of element of the structure or is it an independent of art as part of the rehabilitation of subway and commuter rail Mural” can be installed as a self-standing or structural wall and
the key distinctions between valuing real and object? Is it possible for the work to exist and stations. Projects up to $20 million dollars budget one (1) percent; is ready to be transported world-wide, protected in a steel-casing.
personal property. Exceptional circumstances retain its value in a different location? Can projects greater than $20 million dollars spend one-half (½) As Stuart Alan Levy, a private art dealer in New York, observed, “If
apart, buildings and structures do not typically professionally removing it be accomplished percent. Tunnels, escalators and disability access components are an object is structurally sound, can be appreciated as a work of
move; personal property, by definition, is without damage? How does the site or structure excluded from the formulae. Key to successful designs are sturdy art, and can be relocated to an appropriate alternate venue, there
movable. At the intersection of these two contribute to the value of the object? Would the materials, such as mosaic, tile, or glass, as well as low maintenance shouldn’t be any loss of value because it is moved. It could end
kinds of property is site-specific art. object lose value if removed from its site? Might costs and imagery pertinent to the location. A year ago MTA arts up in a location even more prestigious than it was originally.”
it gain value, particularly if it becomes accessible managers initiated a pro-active program that calls for twice yearly
The term, “site-specific” is, ironically, not to more viewers elsewhere? And, finally, does inspections and condition reports on more than 200 pieces installed Levy, a member of the Fund for Park Avenue Sculpture Committee,
specific enough for a careful discussion. It the work impact the value of the real estate? throughout the system to identify and prioritize maintenance issues. which partners with the New York City Parks Public Art Program, is
describes everything from new, commissioned familiar with site-specific pieces from participating on a committee
work designed for a specific space initiated The next step in valuing these works is to Mega projects, such as the new $530 million dollar new South of citizens with art-related expertise that organizes temporary
at the early planning stages, to a piece determine the method of valuation. When Ferry Terminal in lower Manhattan to replace the old one damaged installations of sculptures along the Park Avenue malls, or medians.
acquired for a pre-existing or contemplated valuing fine art for donation, estate, gift, on 9/11, are showcases for new art. The terminal boasts floor- As with the MTA, it is imperative that materials are able to
site. It can embellish, enhance or even disguise financial or insurance purposes, it is customary to-ceiling glass walls silhouetted by the outlines of trees titled withstand New York’s seasons. Size is also a constraint; sculptures
architectural details or structural imperfections. to use the Comparative Market Data approach. “See it Split, See it Change” by Doug and Mike Starn (American, need to be at least fifteen feet tall to be visible during the milder
Value is based upon past prices for similar 1955- ). Paid $1 million dollars for the four-year project, the weather when the trees on the malls are leafy. While the committee
The relationship between the work and the works by the same artist, or similar works by artists acknowledged they lost money if labor and time were handles paperwork associated with permits and approvals from
structure to which it is attached affects the art another artist of equal standing and related included. Experimenting with the properties of fused glass with various New York City bureaus and covers liability, other costs
work’s value and, therefore, is a consideration reputation. Current and recent comparable their German fabricator took a year. The Starn twins’ auction
12 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 13
RICS-PWFall09.indd 12-13 11/5/09 2:43 PM
Sustainability—Property Underwriting & Valuation Sustainability—Property Underwriting & Valuation
Ten Principles of Sustainable Property not financial outcomes, and thus cannot be the sole basis for performance. To assess potential financial implications of a The process is inherently qualitative, with the valuer conducting
Underwriting and Valuation underwriting from a financial perspective. Practically, investors building with a specific level of sustainable performance, one numerous quantitative “sub-analyses” to generate support for the
will also be confronted with underwriting properties with varying must next measure the market response (regulators, space qualitative selection of key financial inputs like rents, occupancy,
While each sustainable investment decision will differ based sustainable features, performance and green certifications. users and investors) to the building’s sustainable performance. absorption rates, tenant retention, sales prices, expenses, etc.
on the property type, type of investment (retrofit, new Keeping the data and types of performance separate helps
construction, tenant improvement, etc.), geographic market, Most importantly, from a financial perspective, to determine to assess the fit and relative importance of information. Fortunately, as stated in Principle 1, fundamental valuation and due
and sustainable features and strategies employed, ten key which certification and assessment systems are important for diligence practice is up to the challenge. The industry will be well
principles of sustainable property underwriting and investment specific property, the underwriter/valuer must evaluate how GBFC’s Sustainable Property Performance Framework also served to embrace the qualitative nature of real estate analysis and
have emerged from our research that provide important regulators, users and investors utilize and rely upon different provides a structure for underwriters to use in their efforts do it better, rather than holding out for the “killer” statistical study
insights to guide all underwriters and valuers in their work. assessment systems or tools, and the specific sustainability to mitigate risks. Since most significant sustainable property that will, once and for all, prove the enhanced value of sustainable
thresholds to achieve benefits from each group. investment decisions will be based on forecasted building property investment. Over the last three years, statistics-based
Principle 1: No Fundamental Change in Underwriting performance (energy use, occupant performance, development academic studies, cost-benefit studies, and business-case analyses
and Valuation Practice Necessary Principle 3: A New Performance Framework is costs, etc.) underwriters are, or should be, focused on reducing have laid the foundation for why sustainable properties can be
Necessary to Support Sustainable Property uncertainty and risk related to the forecasted performance. As more valuable, but now the industry needs to invest in the data and
Sustainable properties do not require fundamental changes Investment Decision-making has been proven in our research, risk and uncertainty around analytic techniques necessary to support property-specific decisions.
in traditional underwriting or valuation practice. However,
building performance can be significantly mitigated through
underwriters, acquisition analysts, valuers and others will Property performance must be measured and evaluated on Principle 6: Cost-Based Decisions are Inherently Flawed
underwriting of sustainable processes and features/systems.
need to collect new information, employ new analytic multiple levels to better support financial analysis and valuation of
techniques, and adapt capital request presentations to properly sustainable property investment. Five types of performance are most Principle 4: Sustainable Property Investment Financial models and decision-making practices that generate
address some of the special considerations of sustainable important: process performance; feature performance; building Can Create Significant Value results based primarily on initial development and operating
properties that affect financial performance and value. performance; market performance, and financial performance. costs, like the most commonly used Simple Pay-Back or Simple
While operating cost savings achieved through reductions in Return on Investment (ROI) models, are inherently flawed
Principle 2: No Single Definition of This framework highlights the importance of separating the energy, water, maintenance, waste, insurance and other costs because they fail to consider revenue or risk. The limitations
Sustainability is Sufficient different elements of sustainable property performance in order get the most attention, it is the significantly increased demand by in these models have always existed but due to the dramatic
to properly evaluate financial performance. Our research shows regulators, space users, and investors since 2007 that drives value. increases in regulator, user and investor demand for sustainable
Existing green building certifications like LEED®, BREEAM, CASBEE, that process performance drives the success of sustainable properties during the last few years, failure to consider
GreenStar, or Green Globes™ measure environmental outcomes, features and systems, which, in turn, determine building Regulators across all levels of government and national boundaries revenue and risk implications has become more critical.
have embraced the property sector as “low hanging fruit” in
the battle against climate change. Incentives are increasing Simple Payback, Simple ROI, and related cost focused models
and regulations are becoming broader and deeper, moving can still provide useful information for decisions between
toward mandates in many areas. Space users are increasingly different strategies or features (type of lighting systems or
influenced by sustainability. Government tenants, vendors bulbs, material or product selection, etc.) and many sustainable
to sustainability leaders, companies with direct ties to the decisions can be made utilizing these techniques, but as the
sustainability industry, and companies now able to capitalize level of investment and sustainable outcomes desired increases,
on the enterprise value benefits of their sustainable real estate analyses that do not factor in revenue and risk implications
investment are leading the movement toward sustainable space. will result in inferior financial performance for properties.
Institutional investors are leading the industry, with most new
development being built at sustainable levels and significant Principle 7: Sound Sustainable Property Financial Analysis
work being done to assess and upgrade existing portfolios. Requires Consideration of a Discounted Cash Flow Model
Increased demand by regulators, space users and investors Fortunately, the most widely recognized financial model for
positively influences revenues (rents, occupancies, tenant retention, evaluating real estate investments—discounted cash flow analysis
regulatory incentives, etc.) and risks (capitalization and discount (DCF), is well suited to address the financial implications of
rates). These positive revenue and risk benefits, in combination with sustainability. Discounted cash flow analysis provides a conceptual
operating cost savings, outweigh enhanced risks and costs, many framework and model that enables the user to integrate
of which can be mitigated through improved contracts, integrated quantitative and qualitative analysis to measure sustainable property
design, commissioning and other processes and practices. financial performance. Most importantly, it provides the means to
translate the “intermediate” sustainable property cost and benefit
Principle 5: Determining “If” Sustainable outcomes like health or productivity benefits, expedited permitting,
Investment will Enhance Value at Property or lower operating costs into financial measures like rate of
Level Requires Micro-Level Analysis return or net present value traditionally used by real estate capital
providers. Revenue and risk are integrally part of the approach.
Simply put, a valuation or due diligence analyst must determine
whether the strong “general” arguments (outlined in Principle The challenge is to assess the applicability of the general
2 above) supporting enhanced value for sustainable property argument outlined above for a specific property. In this regard,
investment apply to a particular property given planned even if the decision-maker does not execute a full DCF model,
sustainable features and strategies, the property type, the understanding the logic and linkages inherent in a DCF model to
geographic region, expected occupants, market conditions, etc.
To learn about advertising opportunities,
16 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 17
RICS-PWFall09.indd 16-17 11/5/09 2:44 PM
Real Estate & Economy—Canada Real Estate & Economy—Canada
Canadian Industrial Markets
Industrial real estate is the largest asset class with some 1.5
billion square feet across the major markets. The Greater Toronto
market is the third largest market in North America (behind
only Chicago and Los Angeles) and holds approximately half
of Canada’s industrial space. Toronto is the manufacturing
backbone of Canada and is dominated by the automotive
industry, producing roughly one in six North American
automobiles. Toronto also serves as the regional and national
inland distribution hub. Other large industrial hubs include
the Port of Vancouver and inland Calgary hubs for western
Canada along with Montreal and Halifax in the east.
Canada’s industrial markets provide portfolio stability due
Figure 1: Markets Decline—US & Canadian Recession (GDP) Figure 3: Industrial Vacancy Rate Figure 4: International Investment Yields
to their mature and diverse nature. Figure 3 shows that
BMO Nesbitt Economic Research Cushman & Wakefield (Q2 2009) IPD Multinational Index
industrial vacancies have consistently remained in the 4
to 7 percent range, consistently below U.S. markets since
2000 as new supply has been balanced by market demand.
Some of the disparities in performance between U.S. and Montreal, Calgary, Vancouver, and Ottawa (the nation’s 2009, all asset types continued to experience year-over-year
Contributing reasons for the historically strong and stable
Canadian banks can be attributed to the fundamental differences capital) are other large Canadian office markets, each with declining rates of return due largely to an erosion in value.
performance of industrial real estate investment include:
in the banking systems. Canada tends to have more restrictive unique occupancy characteristics and demand drivers.
lending and capital boundaries, a concentrated number of Given the above, a key investment strategy among many
• broad-based user/occupancy structure;
institutions, nationwide branching, and less leveraged capital. During the peak of 2005 and 2006, unprecedented low vacancy institutional players has seen a shift from income-producing
• relatively low cost of re-tenanting and retrofitting space;
These fundamentals allow Canadian institutions to respond and rates, high levels of demand and rising rental rates spurred new assets during the peak years of 2005-06 to buying debt.
• and positive long-term industrial market leasing
diversify nationwide. Geographic diversification also acts as a construction across Canada. As a result, there is a considerable Long-term investors continue to seek low-risk investments
performance and prevailing low vacancy rates.
method of mitigating investment risk, which is especially important new development underway in Downtown Calgary (more than 8 to balance their portfolios. Prospective vendors have only
when balancing the resource and tourism sectors in the west million square feet) and Downtown Toronto (more than 3 million recently begun to acknowledge the new reality of higher
Canadian Office Markets
with manufacturing and financial services in central Canada. square feet), most of which will be completed between the second capitalization rates. As well, financing for real estate has
Canada’s office markets total approximately 414 million half of 2009 and year-end 2011. While traditionally tight office diminished substantially. As a result, investment volumes are
Nationally Diverse Real Estate Markets square feet of space. Again, Toronto is the most significant markets have softened, the new supply anticipated during the down significantly from those seen pre-2008, and, overall,
Canadian market with 163 million square feet, comprising next several years will undoubtedly place downward pressure on deals are taking longer to consummate. Prevailing purchaser
Canada is geographically the second largest country in the achievable rents as landlords seek to retain tenants in the face sentiment suggests that capital is once again looking to
the fifth largest market in North America. Toronto is the
world with almost 10 million kilometers squared (or 3.85 million of rising vacancy. In Toronto, a range of tenants are moving from commercial real estate markets for investment opportunities.
financial capital of Canada and dominated by banks and
square miles), with the longest coastline and longest border with older downtown towers to the newer “green towers” that offer
financial institutions along with their service providers
another country, the United States. Yet Canadian urban centers competitive operating costs and sustainable environments. Across investment and leasing markets, participants are
including legal, accounting and other professional services,
and indeed its real estate markets stretch along the Canadian/ delaying major decisions, instead opting to be patient and
as well as being home the nation’s primary stock exchange.
U.S. border and combined are only the size of New York City’s Globally Competitive Investment Returns wait to take advantage of opportunities. As a result, Canadian
Government and health care are also significant space users.
markets. Canada’s major markets are shown in Figure 2. markets are well positioned for acquisition opportunities
Canadian investment returns have remained competitive based on sound fundamentals, along with an opportunity
globally and have therefore attracted numerous international
investors seeking solid risk-adjusted returns. Similar to global
for value improvements when markets rebound. •
trends, Canadian real estate has faced increasing capitalization
Inventory (sf) Vacancy Rate Inventory (sf) Vacancy Rate rates and decreasing values during the last year, as well as Sheila Botting, FRICS, FCMC, AACI (Hon)
Vancouver 46,453,294 6.9% 181,087,548 4.2% a sharp decline in transaction activity. That said, Canada Senior Managing Director Canada, Capital Markets
tends to have a disciplined and stable real estate investment Cushman & Wakefield Ltd.
Calgary 52,960,967 10.2% 103,282,241 5.3% environment compared with international markets. This stability Cushwake.com
Edmonton 23,879,721 6.9% 95,051,577 2.5% is in part due to a high concentration of ownership among Sheila.firstname.lastname@example.org
Toronto 162,830,064 6.6% 834,970,979 7.1% pension funds and major investors that is particularly focused
on downtown office and major retail assets. Furthermore,
Ottawa 36,171,011 6.5% 22,364,490 4.4%
Canada’s lending and new development practices have limited
Montreal 82,446,396 8.9% 277,144,076 8.2% new supply to largely reflect demand within most markets.
Halifax 9,411,007 9.3% 6,465,783 8.7%
See more in-depth graphs for
Major Market Summary 414,152,460 7.6% 1,519,432,804 6.5%
Total annual real estate returns during 2005 and 2006 reached inventory, vacancy and returns at
highs in the 17 percent to 21 percent range as owners
enjoyed considerable capital appreciation. This range dropped ricsamericas.org/property-world
Figure 2: Canada’s major real estate markets Cushman & Wakefield (August 2009) significantly to just 1 percent to 7 percent in 2008. As of June
20 Find extended articles, charts and more online ricsamericas.org/property-world RICS Property World | Fall 2009 21
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observation that there appears to be a construction leadership find a way to integrate our local workforce with the foreign
vacuum among governments throughout the Caribbean region. experts. Sharing knowledge creates an environment where
people begin to operate more efficiently and effectively.
This may be due to the fact that although governments are meant
to manage the economic, political, social and domestic affairs Equally important is the fact that we don’t have to continue
of their economies, this does not necessarily mean that they are believing that our local professionals and contractors would
equipped to deal with the business threats and opportunities always exceed their budgets and schedules and that their quality
that exist within the macro environment. Their political agenda would almost certainly be a sour issue. While it remains difficult
might not be in sync with sound business principles and to manage both cost and quality at the same time, we must also
practices. Indeed, this problem is even more complex when understand that this is not only the job of the Project Manager,
considered within the context of the construction industry. Even Engineer, Architect or Quantity Surveyor. Quality is everybody’s
with an abundance of local talent and capable contractors, our business. Similarly, the same can be said of cost and time. Hence,
governments have a history of turning to “foreign experts” for improvements in project performance may only arise if all involved
advice, thereby resulting in underutilized resources at the local level. in the delivery process become quality, cost and time focused.
If we are to weather this storm then expert opinion, implementable The Way Forward
strategies, suitable management principles and reform plans
applicable to the current construction climate must be sourced The road to a successful future and a vibrant construction
from within the Caribbean region, simply because our future sector will not be an easy one. There is no doubt, however, that
ultimately depends on us. Where then do we start? serious decisions need to be made soon if we are to reach our
destination. To get there, we need to continue to allow international
Implementation Issues companies to operate freely to some extent. At the same time
our governments cannot continue to say that our domestic
According to numerous stakeholders within the industry the sector supply of labor cannot meet the regional demand because the
cannot survive on short-term projects to sustain their workforce quality and quantity of our work are considered unreliable.
in the medium and long-term. When asked to identify solutions,
a senior official at a leading consulting firm (architects and The crux of the issue is that with the increasing complexity and
engineers) suggested that the region introduce small to medium uncertainty of the business world, practically all worthwhile plans
infrastructure type projects to be implemented over the next and strategies necessitate substantial human, organizational and
one to three years. Projects should focus on improving the road governmental change. Perhaps, the time is ripe for our leaders to
network to facilitate the transportation demand, water supply to find a formula for integrating our local workforce with foreign ones.
rural districts through the construction of small desalination plants On the other hand, governments should insist that contractors
(1 million gallon tanks), educational facilities to better serve our develop workplace learning activities. A very real example might
growing demand to provide for our younger generation. There be where a construction worker be taught to read and write so
also must be eco-environment protection and eco-tourism policy that when the construction site closes down he may be able to
because of our growing need to protect our environment. The perform another task or he may be better prepared to seek further
Caribbean has been labeled as an eco-tourism destination. employment along the same lines. This will certainly work for
those most expected to be affected by the redundancy stigma.
The challenge, however, lies in the implementation
of these projects without incurring the cost and time It is time that we have a vision about where we want to get
Whatever your needs are in the area of valuation and real estate consulting, our professionals have the
overruns we have accepted until now as the norm. to and then get everyone to come along with us on that
eventful journey. Remember, politics is all about trying to knowledge and resources to provide you with fast, accurate, and objective solutions. With over 55
Solutions persuade others to come ‘round to your point of view. Perhaps offices nationwide, Integra Realty Resources is the largest valuation and counseling firm in the United
it’s time we try getting the construction sector to be a part
There are many reports about proposed cutbacks meant to deal with
of the growth and developmental plans for our economies.
the current crisis. Consequently, some estimate that a sizable portion
Our biggest challenge, though, lies in the fact that the key
of the Caribbean’s construction workforce will become unemployed
in the short term due to governments’ defensive strategy and lack
to our future success lies in integration not separation. The services we provide are:
of development initiative. This may be compounded by the fact
that some governments are “inflexible” in that they have their own
• Property Valuation • Valuation for Financial Reporting (VFR)
political agenda and are only prepared to address recommendations • Market & Feasibility Studies • Eminent Domain
made by favored international consultants, who in many instances
do not understand our very different economies and cultures. Steve Rajpatty, MBA, MSc, MRICS, MAPM, • Due Diligence Studies • Portfolio Valuation
MCIOB, FCMI, AACEM, AMAI,
Where is our sense of national pride and Chartered Quantity Surveyor & Chartered Builder • Litigation Support • Specialty Property Valuation
desire for employment sustainability? Chairman & CEO
Associated Services (Caribbean) Ltd.
If we are to continue depending on foreign labor and expertise Asltt.com
in an effort to improve our construction methods then we must email@example.com
30 Find extended articles, charts and more online ricsamericas.org/property-world
1133 Avenue of the Americas, 27th Floor, New York, NY 10036
(212) 255-7858 • www.irr.com
RICS-PWFall09.indd 30-31 11/5/09 2:44 PM
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